Numerous stories are popping up around the personal finance blogosphere with regard to the fact that Chase is raising the minimum payment on its credit cards. Last month, I wrote a post about things are about to get ugly for consumers in terms of their credit card accounts. So it was no surprise when that post (although a month old) saw this recent comment from a reader, Lisa:

Yesterday (6-25-2009) I got a notice saying my “minimum” monthly payment was going from 2% to 5%. That means my payment of $345.00 will start to be $810.00 in August. I will not be able to afford that. Mind you, I always pay my bills, don’t get late payment charges and the last time I checked, my credit score was like 797. Yes! I’m having financial troubles and am just barely holding on. This will send me over the edge - especially if my other credit cards follow this one. … HELP!

This is probably a common refrain across the nation right now. And, sadly, this new rule is aimed exactly at folks like Lisa. Chase will keep your minimum payment at 2%, if you agree to allow the company to raise your interest rate. The most common recipients of this change to credit card terms are those with low introductory rates of between 2.9% and 5.9%. You can see where this is going. The higher interest rate means Chase gets more money, and allowing you to keep the lower minimum means that you make payments for longer — meaning Chase gets more money. The way I see it (and every situation is different), there are three options here:

Option #1: Suck it up and make the new minimum payment

If you don’t agree to the higher interest rate (and keeping the current minimum payment), you will have to make the new payment. Since you have about a month, now is the time to do some serious surgery on your personal finances. Look over your budget and see where you can make cuts. This may include cuts to entertainment, cell phones, eating out and other negotiable expenses. (Note: Your housing payment, especially if you have a mortgage, is not negotiable. Always make sure this is paid.) Figure out which expenses you can cut and get it so you can make the new minimum payment. It’s not pleasant, but in the long run, you will save money in interest and pay off your debt faster.

Unfortunately, many people do not have the option to cut back so dramatically. The current economic conditions mean that some folks, due to cutbacks or layoffs at work, do not have the ability absorb an increase of the magnitude proposed. In such cases, you might go with:

Option #2: New loan

In some cases, it might be wise to get a new loan to cover the amount of what you owe. Pay off the credit card, and move on. Of course, you still have a loan. You might try switching to a different credit card with an introductory rate of between 0% and 3.99%. You could also consider getting a debt consolidation loan from somewhere. If you have reasonably good credit, you might be able to get a personal loan with an interest rate of between 7% and 12% from your bank or credit union. (While this is higher than your intro rate, it is likely to be a lower rate than what the credit card will offer you in exchange for keeping the minimum low.)

Another possibility is to use P2P lending, such as Prosper or Lending Club to help you lower your payments. In any case, though, I would think twice (or thrice) about using a home equity loan to secure your credit card payment. Do that last.

Option #3: Debt settlement or bankruptcy

If nothing seems to be working at all, you can reach for the final tool of desperation in these cases: Debt settlement or bankruptcy. You can usually reach settlement for unsecured debt, allowing you to pay less than you currently owe on your credit card. As an extreme last resort, bankruptcy can help lower your payments to something affordable (even though in recent years bankruptcy laws rarely allow you to walk away). In both cases, your credit will be shot, so it is not a decision to be taken lightly.

What will you do if your credit card minimum is raised?

image source: daylife

Disclaimer: I am not a financial professional. Any information you get from this site is not intended as advice. It is likely to be incomplete, and it may not apply to your individual circumstance. Do your own research, consider your situation and/or consult a professional before making money decisions.

One of the biggest concerns facing many Americans right now is retirement.

Looking at the damage done to retirement investment accounts, thanks to the financial crisis and the current bear market, some are looking for ways to encourage new options for retirees. Even for those with longer time frames until retirement, there is still fear. Even if retirement investment accounts recover and grow between now and retirement in 15 - 20 years, some are concerned that the next crash could pull the rug out from under them just as they retire.

Another problem revolves around the longer life expectencies that retirees are expected to have. Few people now will have enough in their retirement funds to last the 20 to 30 years that people will soon be expected to live after retiring.

Enter an ambitious new bill aimed at shoring up retirement.

In the House, the Retirement Security Needs Lifetime Pay Act (H.R. 2748) is being proposed. This bill would allow a tax break for those who take their retirement investment accounts and used them to buy a lifetime annuity. CNN Money offers a look at two of the main tax breaks offered in the bill:

1. You will be allowed to exclude 50% of annual annuity payouts from a non-qualified plan (one you invested after-tax dollars in) from taxable income. The annual maximum exclusion would be $10,000.
2. You will be allowed to exclude 25% of annual annuity payouts from a qualified plan (401(k), IRA and other tax-deferred accounts) from taxable income.

Additionally, there will also be incentives to purchase what is known as longevity insurance. This is actually another kind of annuity. You wait until you are much older — usually in your eighties — to start taking payments. As a result, the payouts are normally higher. And they would start about the time your retirement investment accounts may be running somewhat lower.

Whether or not this is the answer to the problem of investment-based retirement accounts remains to be seen. But it is clear that there are some definite concerns about the ability of Americans to have enough money throughout retirement. An annuity might be helpful. However, the downside to an annuity is that you trust the management of it someone else. I think I will need to consider the matter further (and see whether this bill makes it through and the tax breaks materialize) before deciding an annuity is right for me. So far, though, I am fairly content with my Roth IRA, which is funded largely with index funds.

Image source: Darren Hester via Flickr

We’ve all heard about the great deals being cut for a number of companies. They’ve enjoyed bailouts and preferential treatment on their financing. Now, consumers may be able to get a bit of a break — and the intiative is coming from the credit card companies.

Credit card debt settlemtent made easy

It has always been possible to employ debt settlement as a method of getting rid of unsecured debt. However, the process has long been fraught with complications and strenuous negotiations. Not so much anymore. CNBC offers an example of what happened when one customer asked to settle his credit card account:

Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

Clearly, the economy is forcing credit card companies to consider their options. With delinquencies and late payments on the rise, it is often easier to collect whatever the customer can offer than to try to collect on a debt that the consumer may not be able to pay. With unemployment and the threat of foreclosure forcing people to prioritize their obligations (your mortgage payment should come first), it is becoming a necessity to accept a debt settlement.

Even though you are getting a good deal with the debt settlement, it is worth noting that by the time you get to this point, you have likely paid more than you originally borrowed — and then some — due to the high rate of interest. Credit card companies may not get their entire interest earnings from you, but they’ve probably already made their profit. And, you should also realize that your credit score may be impacted.

Image source: Daylife

Today, the Federal Reserve released its quarterly report on household wealth. According to MarketWatch, the report contained this information on net worth:

Household net worth fell at a 9.9% annual rate in the first three months of the year to $50.4 trillion, the lowest in more than four years. Net worth — assets minus liabilities — peaked at $64.4 trillion in the spring of 2007, the Fed said in its quarterly flow of funds report.

This is the 7th consecutive quarter that saw a decline in household wealth. While there are some bright spots in the report (more disposable income, lower credit card debt), the fact remains that many people are seeing their overall net worth decline. Home values are declining and investment portfolios are experiencing losses. Since many people have a great deal of their assets tied up in their homes, it is little surprise that the bursting of the real estate bubble has hit net worth. Additionally, with the losses to the stock market, the assets many had in their retirement accounts are dwindling. As I see it, there are two things you can do to reduce the psychological burdens that come with these losses:

1. View your primary residence as a purchase: Instead of thinking of your home as an investment, think of it as a long-term purchase. Consider the intangibles that come with your home (a yard for your kids, your own space, etc.).
2. Remember the long-term value of the stock market: Even though your retirement account may be suffering now, over time stocks gain overall. If you keep investing now, there is a good chance that in 10, 15, 0r 20 years, you will see significant gains.

This still doesn’t change the fact that your net worth may have fallen. However, if you stick with the sound personal finance fundamentals of reducing debt, building your savings, engaging in prudent investing and making your mortgage payments, your net worth will recover — and eventually thrive.

How has your net worth been affected by the recession?

image source: Wikimedia Commons

This is the time of the year that I go on a rampage against the health care industry. Mainly because it’s the time of year that my health insurance is renewed — and my premium usually goes up, in spite of the fact that we rarely use our health insurance. (This year, I was lucky enough to be able to reduce my health insurance premium. But it took a bit of work, and more than 45 minutes on the phone with a representative from my health insurance program.)

So when I saw that 60% of bankruptcies are caused by medical bills, I took immediate interest. But here’s the real kicker, reports Reuters:

More than 75 percent of these bankrupt families had health insurance but still were overwhelmed by their medical debts, the team at Harvard Law School, Harvard Medical School and Ohio University reported in the American Journal of Medicine.

That’s right. Having health insurance probably won’t protect you from bankruptcy in the case of a serious illness. It can help you reduce costs for some things, and can protect you from financial catastrophe on some level (like in the case of my father’s heart attack earlier this year — but it still has taken 6 months for my parents to pay back their portion of the bill), but if you have a serious illness or some other large medical need, your health insurance policy provides flimsy protection. Especially since it will probably be cancelled as soon as the issue is resolved. And, since you have had this illness, getting new coverage may be impossible. Or at the very least, prohibitively expensive.

Recent polls suggest that Americans at least want a public option that they can turn to when the private insurance companies fail them. The Kaiser Health Tracking poll from April showed that 67% of Americans support a public option for health care. This public option is not universal health care by any stretch. Premiums would still have to be paid. But they would be lower than what current insurance companies are charging.

How would it be if insurance companies had to compete with the government? It might mean that $50 - $150 million executive salaries would have to be reduced in order to cut costs so that private companies could be competitive. Or maybe pharma companies would spend less money on marketing (which takes up more than 60% of their profits — research accounts for less than 20%) so that their drugs could be less expensive, also reducing insurance costs. Even better idea: What if health insurance companies, to be more competitive, started offering premium credits to people who were improving their health?

In any case, it is clear that most of our bankruptcies are in actuality caused by health care costs — not by outrageous credit card spending (although that plays its roll, I’m sure). Could reforming health care be a help to our ailing economy? Bottom line: Something needs to be done in order to help alleviate health care costs. It’s one of the major things impeding many people’s personal finances.

image source: Daylife

While I agree with some of the economic stimulus measures that President Barack Obama is trying to implement, I do not agree with all of them. More specifically, I am not happy with the continued focus on credit as the engine of our economy. I have written several posts about the disconnect between what’s good for the economy (consumer debt) and what’s good for our individual finances.

The policies adopted beginning in the years of Reagonomics, on up through Bush, Clinton, Bush II and now, Obama, are aimed at explosive economic growth that is unstable and unsustainable. Not to mention the “economic stimulus” designed to put off the natural down cycles, lest they happen during a specific president’s term. So it is no real surprise that I agree with a lot of what Peter Schiff said last night on The Daily Show. Do you?

Even with optimistic prognostications for economic recovery pouring in (thanks largely to yesterday’s payrolls report), don’t expect credit to be much easier to come by. The credit market has been heavily damaged, and financial institutions are not likely to forget that fact anytime soon. Indeed, credit has been tightening, and it is not likely to loosen for quite some time.

For those looking for a 0% balance transfer credit card, the news is pretty bad. You are unlikely to find a good deal on a credit card, and the debt management methods that usually follow such a course are likely to become less effective. Indeed, the tightening of credit card availability is likely to be further exacerbated by the recently passed Credit CARD Act of 2009. While the intentions are good, and many of the reforms are sorely needed, credit card issuers are likely to begin tightening their requirements, raising their fees and slashing rewards programs.

Getting a loan with the tighter credit requirements

You will still be able to get a loan, even with the tighter credit requirements. However, you may have to work a little harder for it. Whether you are trying to buy a car or purchase a home, here are some things to keep in mind:

• Down payment: The bigger your down payment, the better your rates — and your chances of getting approved in the first place. The larger your down payment, the smaller the amount being financed. And that is in your favor.
• Higher credit score: The credit score you need just to get approved for a loan has gone up. It is more difficult to get a bad credit loan, especially for a house. If you want approval, you need to work to improve your credit score. A higher score will also mean a lower interest rate.
• Income documentation: While it may not be terribly necessary for an auto purchase right now, income documentation is being emphasized more for a home mortgage loan. If you want to buy a house, the days of using unverified income are over. (At least for now. There’s a good chance that in 15 years or so things will be good enough that this whole messy cycle will repeat itself.)

This means that you need to prepare better if you are planning to make a large purchase on credit. Do what you can to improve your credit score, and save up money for a down payment. Those who are prepared are likely to still find credit at good rates. But the unprepared will either be rejected outright or will have to pay a premium to get approval.

Two disclaimers on today’s Friday Fun Video:

1. I don’t actually recommend freecreditreport.com. Instead, I recommend that you use annualcreditreport.com. And then for the other times during the year that you check your credit report, consider buying a triple report. They are usually less than $40 (and around $50 if you want your FICO score thrown in).
2. I enjoy a good trip to the Renaissance Fair as much as the next person. You get to dress up and eat junk food. Plus, I like to look at (and possibly purchase) weaponry.

Happy Friday!

A lot of space in the blogosphere has been given over to the recent passage of the Credit CARD Act of 2009. And for good reason. This is one of the most sweeping changes to The Way Things Are to come along for quite some time. But here are 3 surprising things in the Credit CARD Act. 3 things you might not have heard about.

1. Concealed weapons ban lifted for national parks. This is the biggest surprise in the Credit CARD Act because it has absolutely nothing to do with credit or credit cards. It was just sort of slipped in there. So, if you have a concealed weapon and permit, you are allowed to bring it into the national parks.
2. Gift card expiration date rule. It is terribly annoying to get gift cards, and find out that they have expired in 6 or 12 months. Congress now requires gift cards to last at least 5 years before they expire, and for expiration policies to be placed, in all caps and 10-point font, on the card.
3. Credit card payoff information. This is my favorite provision in the Credit CARD Act that no one seems to be talking about. Credit card issuers now have to print, on your statement, where you can see it, how long it will take you to pay off your credit card if you only pay the minimum balance. This is great. Many people simply look at the minimum and pay it without considering. Actually seeing how long it will take to pay off the credit card may spur some to take more immediate and drastic action.

Have you found anything else in the Credit CARD Act that isn’t being much talked of?

image source: Junglecat via Wikimedia Commons

With the passage yesterday of the Credit CARD Act of 2009, it is little surprise that the subject of credit is on my mind. And one of the most interesting and informative books on the subject of credit and credit scoring is Your Credit Score: Your Money & What’s At Stake by Liz Pulliam Weston. It’s an update of an earlier book, written in 2004. This newer version goes in depth into this important number, and offers the facts about what you can do to improve your credit — and includes information on the new FICO 08, as well as practical advice for getting through tough financial times.

Pulliam starts out by explaining why your credit score matters, and continues with a history lesson, describing how credit scoring came to be, and why it is so prevalent now in every aspect of our financial lives — from jobs to securing insurance to getting a home loan. She also takes some time to describe how the credit scoring system works, as well as addressing VantageScore, a new competitor to FICO.

The bulk of the book, however, is concerned with the practical application of techniques, financial habits and practices that can help you improve your credit score. Your Credit Score even devotes a section to building a credit score when you don’t have credit. Pulliam offers step-by-step information that can help you resolve a number of credit issues, from mistakes on your credit report to reporting identity theft. She also tackles common credit myth that are continually perpetuated. This is, without a doubt, one of the most useful personal finance handbooks I have read recently.

I like Pulliam’s levelheaded approach to credit. She points this out: “You don’t have to live in debt to get a decent score, but you do need to use credit.” I enjoy her middle of the road view of credit. Pulliam doesn’t represent extremes. She simply offers you solid information and the knowledge you require to make a plan to improve your credit score and then keep it healthy.

Have you read Your Credit Score? Did you like it?